Caminus 10-Q 2002 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

OR

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     .

COMMISSION FILE NUMBER 000-28085

CAMINUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) 13-4081739
(IRS EMPLOYER
IDENTIFICATION NO.)

825 THIRD AVENUE
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 515-3600

         Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

         As of April 30, 2002, there were 19,592,340 shares of Caminus Corporation common stock outstanding.

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES

CAMINUS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31,2002

TABLE OF CONTENTS

			PAGE
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		a) Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and December 31, 2001		3
		b) Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (Unaudited)		4
		c) Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (Unaudited)		5
		d) Notes to Consolidated Financial Statements		6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			20
PART II. OTHER INFORMATION
	Item 2. Changes in Securities and Use of Proceeds			21
	Item 6. Exhibits and Reports on Form 8-K			22
	Signatures			23

2

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

			MARCH 31,			DECEMBER 31,
			2002			2001
			(UNAUDITED)
ASSETS
Current assets:
	Cash and cash equivalents		$	29,767		$	35,387
	Investments in short-term marketable securities			11,652			6,640
	Accounts receivable, net			23,354			22,002
	Prepaid expenses and other current assets			4,627			2,361
		Total current assets		69,400			66,390
Investments in long-term marketable securities				3,200			—
Fixed assets, net				7,456			7,173
Acquired and internally developed technology, net				15,428			18,441
Other intangibles, net				13,639			14,936
Goodwill, net				59,147			58,045
Other assets				1,852			1,994
		Total assets	$	170,122		$	166,979
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	3,226		$	4,108
	Accrued liabilities			9,651			16,044
	Income taxes payable			10			1,515
	Deferred revenue			9,305			12,707
		Total current liabilities		22,192			34,374
	Long-term debt			—			15,000
		Total liabilities		22,192			49,374
Commitments and contingencies				—			—
Stockholders’ equity:
Common stock, par value $0.01 per share, 50,000 shares authorized; 19,592 shares issued and outstanding at March 31, 2002; 19,663 shares issued and 17,901 outstanding at December 31, 2001				196			197
Additional paid-in capital				190,600			164,131
Treasury stock, at cost				—			(4,911	)
Deferred compensation				(557	)		(677	)
Accumulated deficit				(41,569	)		(40,676	)
Accumulated other comprehensive loss				(740	)		(459	)
		Total stockholders’ equity		147,930			117,605
		Total liabilities and stockholders’ equity	$	170,122		$	166,979

The accompanying notes are an integral part of these consolidated financial statements.

3

CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

				THREE MONTHS ENDED
				MARCH 31,
				2002			2001
				(UNAUDITED)
Revenues:
	Licenses			$	10,996		$	6,366
	Software services				13,294			7,553
	Strategic consulting				1,011			2,476
		Total revenues			25,301			16,395
Cost of revenues:
	Cost of licenses				189			177
	Cost of software services				5,507			4,048
	Cost of strategic consulting				935			1,169
Amortization of acquired technology					3,982			576
Total cost of revenues					10,613			5,970
			Gross profit		14,688			10,425
Operating expenses:
	Sales and marketing				2,572			2,723
	Research and development				6,491			2,836
	General and administrative				6,815			4,035
	Amortization of intangible assets				589			3,160
		Total operating expenses			16,467			12,754
Loss from operations					(1,779	)		(2,329	)
	Interest and other income (expense), net				(295	)		533
Loss before provision for (benefit from) income taxes					(2,074	)		(1,796	)
Provision for (benefit from) income taxes					(1,181	)		627
Net loss				$	(893	)	$	(2,423	)
Basic and diluted net loss per share				$	(0.05	)	$	(0.15	)
Weighted average shares used in computing basic and diluted net loss per share					18,074			15,725

The accompanying notes are an integral part of these consolidated financial statements.

4

CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

				Three Months Ended March 31,
				2002			2001
Cash flows from operating activities:				(Unaudited)
	Net loss			$	(893	)	$	(2,423	)
	Adjustments to reconcile net loss to net cash used in operating activities:
			Depreciation and amortization		5,235			4,146
			Deferred taxes		—			75
			Deferred costs		—			52
			Non-cash compensation expense		120			27
			Bad debt expense		189			100
	Changes in operating assets and liabilities:
			Accounts receivable		(1,541	)		(2,007	)
			Prepaid expenses and other current assets		(1,229	)		408
			Accounts payable		(882	)		(282	)
			Accrued liabilities		(5,801	)		(3,811	)
			Taxes payable		(1,505	)		428
			Deferred revenue		(3,402	)		898
			Capitalized software development costs		(972	)		—
			Other		142			—
Net cash used in operating activities					(10,539	)		(2,389	)
Cash flows from investing activities:
		Purchase of marketable securities			(8,212	)		(2,556	)
		Purchase of fixed assets			(944	)		(972	)
		Acquisition of Altra			(986	)		—
		Acquisition of Nucleus			—			(100	)
Net cash used in investing activities:					(10,142	)		(3,628	)
Cash flows from financing activities:
			Cash received for stock issued under employee stock purchase plan		479			469
			Repayment of borrowing under credit facility		(15,000	)		—
			Net proceeds received from the issuance of common stock		29,222			—
			Cash received from exercises of stock options		641			214
Net cash provided by financing activities					15,342			683
Effect of exchange rates on cash flows					(281	)		(34	)
Net decrease in cash and cash equivalents					(5,620	)		(5,368	)
Cash and cash equivalents, beginning of year					35,387			16,883
Cash and cash equivalents, end of period				$	29,767		$	11,515

The accompanying notes are an integral part of these consolidated financial statements.

5

CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

1. BUSINESS AND ACCOUNTING POLICIES

Business

         Caminus Corporation (“Caminus” or the “Company”) was incorporated in Delaware in September 1999. Caminus was formed to succeed Caminus LLC as the parent organization for the subsidiaries formerly held by Caminus LLC.

         Caminus is a leading provider of software and strategic consulting services that facilitate energy trading, transaction processing, risk management, and decision support within the wholesale energy markets. The Company’s integrated software solutions, which cover all functional areas across the energy value chain and handle all major energy commodities and financial instruments, enable energy companies to more efficiently and profitably trade energy, streamline transaction management, manage complex risk scenarios, and make optimal operational decisions. The Company’s software can be used by any entity that buys, sells, trades, or takes a position in energy. Caminus serves customers in every segment of the wholesale energy industry, including traders, marketers, generators, producers, gatherers, processors, pipelines, utilities, distribution companies, and public agencies.

Principles of consolidation

         The accompanying consolidated financial statements include the accounts of Caminus Corporation and its subsidiaries. All intercompany transactions and balances have been eliminated.

Software development costs

         Software development costs are expensed as incurred, except that capitalization of software development costs begins upon establishment of technological feasibility of the product. After technological feasibility is established, significant software development costs are capitalized until the product is available for general release. The capitalized software development costs are then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. Through 2001, the period between achieving technological feasibility, which the Company has defined as establishment of a working model, which typically occurs when beta testing commences, and the general release of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company did not capitalize any software development costs through December 31, 2001. At the end of 2001, the company acquired Altra Software Services, Inc., which was involved in a major software development effort to create a new platform for its software products. During the quarter ended March 31, 2002, Caminus continued the development of this platform, on which the Company expects most of its future products will reside, beginning with gas functionality. Certain elements of this effort met the criteria for the capitalization of software development costs, and accordingly, $972 of these costs were capitalized during the quarter ended March 31, 2002. The related amortization of these capitalized costs for the quarter ended March 31, 2002 was $3, and is included in cost of licenses revenues.

New accounting pronouncements

         In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that effective January 1, 2002 goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Under Statement 142 intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

         The Company adopted the provisions of Statements 141 and 142 effective July 1, 2001 and January 1, 2002 respectively. In connection with the adoption of Statement 142, the Company evaluated its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and intangible assets for assembled workforce in place related to certain prior acquisitions were reclassified to goodwill in order to conform with the new criteria in Statement 141 for recognition of intangible assets apart from

6

goodwill. The Company did not modify the useful lives and residual values of its intangible assets acquired in purchase business combinations. In connection with the adoption of Statement 142, the Company performed an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. The Company assigned the existing goodwill and intangible assets to its North American reporting unit and as of the date of adoption determined that the fair value of the reporting unit exceeded the carrying amount and thus the goodwill was not impaired.

         As of January 1, 2002, the Company had unamortized goodwill in the amount of $58,045 and unamortized identifiable intangible assets in the amount of $33,377, all of which were subject to the transition provisions of Statements 141 and 142. After the reclassification of $708 of intangible assets for an assembled workforce in place to goodwill, as of March 31, 2002, the Company has goodwill and identified intangible assets with definite lives of $59,147 and $29,067, respectively. Effective January 1, 2002, the Company is not amortizing goodwill. The following table provides the pro forma results for the three months ended March 31, 2001 as if the nonamortization provisions of Statement 142 had been in effect.

		Three Months Ended
		March 31,
		2002			2001
		(unaudited)
Loss from Operations		$	(1,779	)	$	(2,329	)
	Add back amortization of goodwill		—			2,671
Adjusted profit (loss) from operations		$	(1,779	)		342
	Interest and other income (expenses), net		(295	)		533
Income (loss) before provision for income taxes			(2,074	)		875
Provision for (benefit from) income taxes			(1,181	)		627
Adjusted net income (loss)			(893	)		248
Adjusted net income (loss) per share		$	(0.05	)	$	0.02
Weighted average shares used in computing adjusted net income (loss) per share			18,279			16,123

Reclassifications

         Certain reclassifications were made to prior period amounts to conform to the current period presentation format.

Net loss per share

         Basic and diluted net loss per share is computed by dividing net loss for the period by the weighted average number of shares outstanding for the period. The calculation of diluted net loss per share excludes options (2,594 outstanding as of March 31, 2002) to purchase common shares, as the effect of including such options would be antidilutive.

Comprehensive Loss

         Total comprehensive loss for the three months ended March 31, 2002 and 2001 was as follows:

	THREE MONTHS ENDED
	MARCH 31,
	2002			2001
Net loss	$	(893	)	$	(2,423	)
Unrealized gains on marketable securities		—			144
Foreign currency translation adjustment		(281	)		(30	)
Comprehensive loss	$	(1,174	)	$	(2,309	)

7

2. SUPPLEMENTAL CASH FLOW INFORMATION

	THREE MONTHS ENDED MARCH 31,
	2002		2001
Unrealized gains on available-for-sale securities		—		144
Interest paid		522		—
Income taxes paid		782		385

3. ACQUISITION OF ALTRA SOFTWARE SERVICES, INC.

         On November 20, 2001, Caminus completed its acquisition of Altra Software Services, Inc. (“Altra”), a provider of software solutions to the energy industry, by purchasing all of the capital stock of Altra. As a result of the acquisition, the Company combined Caminus’ historical strength in software for the financial and risk management of power with Altra’s expertise in software for management of physical logistics and transactions in the gas markets to create a strong suite of integrated applications for the growing number of participants in both gas and electricity. The combination also provides the Company with significant cross-selling opportunities to existing customers.

         The purchase price of $60,794 consisted of $24,947 in cash, the issuance of 1,975 shares of common stock with a fair value of $33,891 and approximately $1,956 of other direct acquisition costs including liabilities for severance. The number of common shares issued was determined in negotiations between the parties based upon the average market price of the Company’s common stock over the three-day period before and after the terms of the acquisition were agreed to and announced. The purchase price is subject to adjustment, depending on the final determined value of the tangible net worth, as defined, of Altra, as more fully described in the Stock Purchase Agreement. As a result, 994 of the shares of common stock issued in the acquisition are being held in escrow pending the final determination of the purchase price, and the resolution of certain contingencies. The cash portion of the purchase price was paid for in part from the proceeds of a $15,000 Term Credit Agreement, dated as of November 20, 2001, between the Company and Blue Ridge Investments LLC, and in part from Caminus’ cash and cash equivalents. A summary of the allocation of the acquisition purchase price is as follows:

Fair value of current assets assumed	$	6,428
Fair value of property, plant and equipment assumed		1,519
Fair value of current liabilities assumed		(19,195	)
Acquired in-process research and development		1,300
Acquired technology		17,659
Other identifiable intangible assets		11,100
Goodwill		41,983
	$	60,794

         The acquisition was accounted for under the purchase method of accounting. Altra’s results of operations are included in the statement of operations from December 1, 2001. The fair value assigned to intangible assets acquired was based on an independent appraisal. Acquired technology represents the fair value of applications and technologies existing at the date of acquisition. The fair value of the acquired technology of $12,500 was determined based on the future discounted cash flows method, which will be amortized on a straight line basis over the estimated product life, or the ratio of current revenue to total projected product revenue, whichever is greater. For customer contracts where deferred revenue was recorded representing the cash received prior to the acquisition date, the Company recorded $5,159 of additional acquired technology under the gross method, which will be amortized as the related revenue is recognized. Other intangible assets represent the fair value of customer relationships. Goodwill is the only asset not subject to amortization, although it will be deductible for tax purposes over fifteen years.

         Acquired in-process research and development (“IPR&D”) represents the fair value of the project under development at the date of acquisition. The allocation of $1,300 to IPR&D represents the estimated fair value related to an incomplete project based on risk-adjusted cash flows. At the date of the acquisition, the project associated with the IPR&D efforts had not yet reached technological feasibility and had no alternative future uses. Accordingly, these costs were expensed upon acquisition. At the acquisition date, Altra was conducting development associated with the next generation of its gas marketing product. The project under development, at the valuation date, is expected to address the functional limitations of the existing product and to meet the needs of a changing energy market environment.

8

         At the acquisition date, Altra was approximately 50% complete with the IPR&D project. Estimated future development costs totaled $2,500 at the time of acquisition. The Company anticipates that research and development related to this project will be completed in the first half of 2002, after which the Company expects to begin generating economic benefits from the value of the completed IPR&D.

         Had the acquisition of Altra occurred on January 1, 2001 the unaudited pro forma revenues, net loss and basic and diluted net loss per share for the three months ended March 31, 2001 would have been: $24,207, $5,775 and $0.33, respectively. The per share amounts were based on a weighted average number of shares outstanding of 17,700. These results, which give effect to certain adjustments, including the amortization of Altra’s intangible assets excluding goodwill, interest expense, provision for income taxes and additional shares outstanding, are not necessarily indicative of results that would have occurred had the acquisitions been consummated on January 1, 2001 or that may be obtained in the future.

4. STOCKHOLDERS’ EQUITY

         In March 2002, the Company sold 1,593 shares of common stock resulting in net proceeds of $29,222. The Company used $15,000 of these proceeds to repay its borrowings under a credit facility with the remainder available for working capital and general corporate purposes.

         In the first quarter of 2002, the Company retired its 1,762 treasury shares.

5. INCOME TAXES

         In the first quarter of 2002, the Company formalized transfer pricing agreements for intercompany royalties and other charges for 2002, 2001 and 2000. The application of these intercompany agreements had no impact on pre-tax consolidated amounts but shifted taxable income for prior years from the U.K. to the U.S. resulting in a net tax benefit of $1,372. The reduced taxable income in the U.K. resulted in a reduction of prior taxes of $2,409. The increased taxable income in the U.S. resulted in a tax provision of $1,037 as a portion of the benefit associated with the utilization of the net operating loss carryforwards was allocated to additional paid-in capital. The shift in taxable income to the U.S. resulted in no tax liability, but reduced the Company's net operating loss carryforwards to approximately $8,700 as of March 31, 2002 of which the entire benefit, when utilized, would be allocated to additional paid-in-capital.

6. SEGMENT REPORTING

         The Company has three reportable segments: software, strategic consulting and corporate. Software comprises the licensing of the Company’s software products and the related implementation and maintenance services. Strategic consulting provides energy market participants with professional advice regarding where and how to compete in their respective markets. Corporate includes general overhead and administrative expenses not directly related to the operating segments, including rent and facility costs. Items recorded in the consolidated financial statements for purchase accounting, such as goodwill, intangible assets and related amortization, have been pushed down to the respective segments for segment reporting purposes. In evaluating financial performance, management uses earnings before interest and other income, income taxes, amortization, depreciation and non-cash compensation expense (“Adjusted EBITDA”) as the measure of a segment’s profit or loss.

         The accounting policies of the reportable segments are the same as those described in Note 2 of the Company’s Annual Report on Form 10-K. There are no inter-segment revenues or expenses between the three reportable segments.

9

         The following table illustrates the financial results of the three reportable segments:

								THREE MONTHS ENDED MARCH 31,
				2002											2001
				(IN THOUSANDS)
							Strategic											Strategic
				Software			Consulting		Corporate			Total			Software			Consulting			Corporate			Total
Operating Results:
	Revenues:
		Licenses		$	10,996		$	—	$	—		$	10,996		$	6,366		$	—		$	—		$	6,366
		Software services			13,294			—		—			13,294			7,553			—			—			7,553
		Strategic consulting			—			1,011		—			1,011			—			2,476			—			2,476
			Total revenues	$	24,290		$	1,011		—		$	25,301		$	13,919		$	2,476		$	—		$	16,395
Adjusted EBITDA					9,592			76		(6,092	)		3,576			4,170			1,233			(3,559	)		1,844
	Non-cash compensation expense				—			—		(120	)		(120	)		—			—			(27	)		(27	)
					9,592			76		(6,212	)		3,456			4,170			1,233			(3,586	)		1,817
Amortization/ Depreciation					(4,574	)		—		(661	)		(5,235	)		(3,219	)		(518	)		(409	)		(4,146	)
Operating income/(loss)				$	5,018		$	76	$	(6,873	)	$	(1,779	)	$	951		$	715		$	(3,995	)	$	(2,329	)
Total Assets				$	145,482		$	7,414	$	17,226		$	170,122		$	63,966		$	8,821		$	26,768		$	99,555

7. SUBSEQUENT EVENT

         On April 24, 2002, the shareholders approved an increase in the authorized shares available for issuance under the 2001 non-qualified stock option plan by 350 to 1,050 shares and under the 1999 stock option plan by 200 to 1,419 shares.

10

Item 2.Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

         This quarterly report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this quarterly report are based on information available to us up to, and including the date of this document, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below under “Certain Factors that May Affect Our Business” and elsewhere in this quarterly report. You should also carefully review the risks outlined in other documents that we file from time to time with the Securities and Exchange Commission.

Overview

         We are a leading provider of software solutions and strategic consulting services that facilitate energy trading, transaction processing, risk management, and decision support within the North American and European wholesale energy markets. We were organized as a limited liability company in April 1998, and acquired Zai*Net Software, L.P. and Caminus Limited in May 1998, Positron Energy Consulting in November 1998, DC Systems, Inc. in July 1999, Nucleus Corporation and Nucleus Energy Consulting Corporation (collectively, “Nucleus”) in August 2000, and Altra Software Services, Inc. (“Altra”) in November 2001. In February 2000, we closed the initial public offering of 4.1 million shares of our common stock, realizing net proceeds from the offering of approximately $59.0 million. In March 2002, we closed a secondary offering of 1.6 million shares of our common stock, realizing net proceeds of approximately $29.2 million.

         Since our inception, through our acquisitions and internal growth, we have expanded our organization rapidly, particularly in marketing, sales, and research and development. Our full-time employees increased from 357 at March 31, 2001, to 521 at March 31, 2002, and we intend to continue to increase our number of employees in 2002.

         We generate revenues from licensing our software products, providing related implementation services and support, and providing strategic consulting services. We generally license one or more products to our customers, who typically receive perpetual licenses to use our products for a specified number of servers and concurrent users. After the initial license, they may purchase licenses for additional products, servers and users as needed. In addition, customers typically purchase professional services from us, including implementation and training services, and enter into renewable maintenance contracts that provide for software upgrades and technical support over a stated term, typically twelve months. Our strategic consulting practice provides energy market participants with strategic advice on how to operate in and profit from competitive energy markets.

         Customer payments under our software license agreements are non-refundable. Payment terms generally require that a significant portion of the license fee is payable on delivery of the licensed product with the balance due in installments.

         The Company generates revenues from licensing its software products, providing related implementation services and support and providing strategic consulting services. The Company follows the provisions of Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.” Under SOP No. 97-2, if the license agreement does not provide for significant customization of or enhancements to the software, software license revenues are recognized when a license agreement is executed, the product has been delivered, all significant obligations are fulfilled, the fee is fixed or determinable and collectibility is probable. For those license agreements where customer acceptance is required and it is not probable, license revenues are recognized when the software has been accepted. For those license agreements where the licensee requires significant enhancements or customization to adapt the software to the unique specifications of the customer or the service elements of the arrangement are considered essential to the functionality of the software products, both the license revenues and services revenues are recognized using contract accounting. If acceptance of the software and related software services is probable, the percentage of completion method is used to recognize revenue for those types of license agreements, where progress towards completion is measured by comparing software services hours incurred to estimated total hours for each software license agreement. If acceptance of the software and related software services is not probable, then the completed contract method is used and license revenues are recognized only when the Company’s obligations under the license agreement are completed and the software has been accepted. Accordingly, for these contracts, payments received and software license costs are deferred until the Company’s obligations under the license agreement are completed. Anticipated losses, if any, on uncompleted contracts are recognized in the period in which such losses are determined. Maintenance and support revenues associated with new product licenses and renewals are deferred and recognized ratably over the contract period. Software services revenues, not required to be recognized using contract accounting, and strategic consulting revenues are typically billed on a time and materials basis and are recognized as such services are performed. When software licenses, services and/or maintenance are bundled in one arrangement, the fair value of the maintenance fees is determined by

11

the contractual renewal rate and the fair value of the services is based upon the amount the Company invoices customers for such services when they are sold on a stand alone basis.

         We sell our products through our direct sales forces in North America and Europe. Also, our strategic consulting group, in addition to generating consulting fee revenue, assists in generating software sales leads.

         Our results of operations may experience seasonal fluctuations as customers and potential customers in our industry face budgetary pressures to invest in energy software before year-end. Accordingly, we may tend to report higher revenues during the fourth quarter of the year and lower revenues during the first quarter.

         Revenues from customers outside the United States represented 25% of our total revenues for the three months ended March 31, 2002. A significant portion of our international revenues has historically been derived from sales of our strategic consulting services and software products in the United Kingdom. We intend to continue to expand our international operations and commit significant management time and financial resources to developing our direct international sales channels. International revenues may not, however, increase as a percentage of total revenues.

         “Adjusted EBITDA” is defined as earnings before interest and other income, income taxes, depreciation, amortization, and non-cash compensation expense., EBITDA is a non-GAAP measure commonly used by investors and analysts to analyze companies on the basis of operating performance, leverage and liquidity. We present Adjusted EBITDA, which is also a non-GAAP measure, to enhance the understanding of our operating results. We believe that Adjusted EBITDA is an indicator of our operating profitability since it excludes items that are not directly attributable to our ongoing business operations. However, Adjusted EBITDA relies upon our management’s judgment to determine which items are directly attributable to our ongoing business operations and as such is subjective in nature. Adjusted EBITDA should not be construed as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operations as a measure of our liquidity. For information about cash flows or results of operations in accordance with generally accepted accounting principles, please see our consolidated financial statements and related notes included elsewhere in this quarterly report.

         Due to our acquisition of Altra, along with the significant changes in our operations, the fluctuation of financial results, including financial data expressed as a percentage of revenues for all periods, does not necessarily provide a meaningful understanding of the expected future results of our operations. The results of operations of Altra are included in our consolidated results of operations beginning December 2001.

Results of Operations

         The following table sets forth, except for cost of licenses, cost of software services, and cost of strategic consulting, which are expressed as a percentage of their related revenues, and amortization of acquired technology, which is expressed as a percentage of license revenues, the consolidated financial information expressed as a percentage of revenues for the three months ended March 31, 2002 and 2001. The consolidated financial information for the periods presented are derived from the unaudited consolidated financial statements included elsewhere in this quarterly report.

				THREE MONTHS
				ENDED
				MARCH 31,
				2002			2001
Revenues:
	Licenses				43	%		39	%
	Software services				53			46
	Strategic consulting				4			15
			Total revenues		100			100
Cost of revenues:
	Cost of licenses				2	%		3	%
	Cost of software services				41			54
	Cost of strategic consulting				92			47
		Amortization of acquired technology			36			9
Gross profit					58			64
Operating expenses:
	Sales and marketing				10	%		17	%

12

			THREE MONTHS
			ENDED
			MARCH 31,
			2002			2001
	Research and development			26			17
	General and administrative			27			25
	Amortization of intangible assets			2			19
		Total operating expenses		65			78
Loss from operations				(7	)		(14	)
Other income (expense)				(1	)		3
Provision for (benefit from) income taxes				(4	)		4
Net loss				(4	)%		(15	)%

Revenues

         Licenses: License revenues represented 43% and 39% of the total revenues for 2002 and 2001, respectively, and increased $4.6 million, or 72%, from $6.4 million in 2001 to $11.0 million in 2002. This increase was primarily attributable to increased demand for new and additional licenses from new and existing customers, larger average transaction sizes and the addition of revenue recognized from Altra.

         Software services: Software services revenues represented 53% and 46% of the total revenues for 2002 and 2001, respectively, and increased by $5.7 million, or 76%, from $7.6 million in 2001 to $13.3 million in 2002. This increase was primarily attributable to the increased licensing activity described above, which resulted in increased revenues from customer implementations and maintenance contracts, and the inclusion of Altra in 2002. The greater percentage increase in software services revenues as compared to the increase in license revenues was primarily attributable to the increase in the customer base that has maintenance contracts. Typically, software services, including implementation and support services, are provided subsequent to the recognition of the license revenues.

         Strategic consulting: Strategic consulting revenues represented 4% and 15% of the total revenues for 2002 and 2001, respectively, and decreased $1.5 million, or 59%, from $2.5 million in 2001 to $1.0 million in 2002. This decrease was primarily attributable to the absence of a comparable revenue stream to replace the successful New Electricity Trading Arrangements (“NETA”) consulting engagement in Europe, which was completed on March 29, 2001. Due to softness in the market for these services and increased competition, we expect lower strategic consulting revenue for the remainder of 2002 in comparison to 2001.

Cost of Revenues

         Cost of licenses: Cost of licenses primarily consists of the software license costs associated with third-party software that is integrated into our products. Cost of licenses as a percentage of license revenue decreased from 3% in 2001 to 2% in 2002.

         Cost of software services: Cost of software services consists primarily of personnel costs associated with providing implementations, support under maintenance contracts and training through our professional service group. Cost of software services increased $1.5 million, or 36%, from $4.0 million in 2001 to $5.5 million in 2002. As a percentage of software services revenue, costs decreased from 54% in 2001 to 41% in 2002. The decrease as a percentage of revenue is the result of an increase in our installed customer base with maintenance contracts and higher implementation consultant utilization percentages. The increase in absolute dollars was primarily attributable to an increase in the number of implementations, training and technical support personnel, including former Altra personnel, to support the growth of the implementations and the installed customer base. We plan to continue expanding our implementation and support services group and, accordingly, expect the dollar amount of our cost of software implementation and support services to increase.

         Cost of strategic consulting: Cost of strategic consulting consists of personnel costs incurred in providing professional consulting services. Cost of strategic consulting decreased $0.2 million, or 20%, from $1.2 million in 2001 to $1.0 million in 2002. As a percentage of strategic consulting revenue, costs increased from 47% in 2001 to 92% in 2002. The increase as a percentage of revenue resulted from lower consultant utilization percentages due to softness in the market for these services and increased competition. The Company is evaluating various alternatives to improve consultant utilization percentages and increase margins.

         Amortization of acquired technology: Amortization of acquired technology represents the amortization of the value placed on the technology acquired through our acquisitions. Amortization of acquired technology increased $3.4 million from $0.6 million in 2001 to $4.0 million in 2002. As a percentage of license revenue, these costs increased from 9% in 2001 to 36% in 2002. Both the increase in cost and percentage of license revenue was due primarily to our acquisition of Altra in November 2001.

13

Operating Expenses

         Sales and marketing: Sales and marketing expenses consist primarily of sales and marketing personnel costs, travel expenses, advertising and trade show expenses and commissions. Sales and marketing expenses decreased $0.2 million, or 6%, from $2.7 million in 2001 to $2.6 million in 2002. As a percentage of revenue, sales and marketing expenses decreased from 17% in 2001 to 10% 2002. The decrease as a percentage of revenue is the result of our increase in revenue and the timing of advertising and promotional expenses in 2002 compared to 2001.

         Research and development: Research and development expenses consist primarily of personnel costs for product development personnel and other related direct costs associated with the development of new products, the enhancement of existing products, quality assurance and testing. Research and development expenses increased $3.7 million, or 129%, from $2.8 million in 2001 to $6.5 million in 2002. As a percentage of revenue, research and development expenses increased from 17% in 2001 to 26% in 2002. The increased cost as a percentage of revenue was due primarily to an increase in personnel and to other expenses associated with the development of new products and enhancements of existing products, due in part to the acquisition of Altra.

         General and administrative: General and administrative expenses consist primarily of personnel costs of executive, financial, human resources and information services personnel, as well as facility costs and related office expenses, management fees and outside professional fees. General and administrative expenses increased $2.8 million, or 69%, from $4.0 million in 2001 to $6.8 million in 2002. As a percentage of revenue, general and administrative expenses increased from 25% in 2001 to 27% in 2002. The increase in cost is due primarily to increased staffing required to support our expanded operations in the United States, along with an increase in rent and other expenses in 2002 compared to 2001 as a result of our acquisition of Altra in November 2001.

         Amortization of intangible assets: The amortization of intangible assets represents the amortization of other intangible assets and for 2001, goodwill. Amortization of intangibles decreased $2.6 million, or 81%, from $3.2 million in 2001 to $0.6 million in 2002. As a percentage of revenue, amortization expense decreased from 19% in 2001 to 2% in 2002. Both the decrease in expense and as a percentage of revenue are the result of the adoption of FAS No. 142, which eliminated the amortization of goodwill effective January 1, 2002. Had FAS No. 142 been in affect for the three months of 2001 amortization expense for the period would have been $0.5 million.

Loss From Operations

         As a result of the variances described above, operating loss decreased by $0.6 million, from $2.3 million in 2001 to $1.8 million in 2002. Operating expenses as a percentage of revenues were 65% and 78% for 2002 and 2001, respectively.

Interest and Other Income (Expense), net

         Interest and other income (expense) changed by $0.8 million, from $0.5 million of income in 2001 to $(0.3) million of net expense in 2002, due primarily to interest expense in 2002 associated with the $15 million credit facility.

Provision for (Benefit from) Income Taxes

         Provision for (benefit from) income taxes was $(1.2) million in 2002 compared to $0.6 million in 2001. In the first quarter of 2002, the Company formalized transfer pricing agreements for intercompany royalties and other charges for 2002, 2001 and 2000. The application of these intercompany agreements had no impact on pre-tax consolidated amounts but shifted taxable income for prior years from the UK to the US resulting in a net tax benefit of $1.4 million. The reduced taxable income in the UK resulted in a reduction of prior taxes of approximately $2.4 million. The increased taxable income in the US resulted in a tax provision of $1.0 million as a portion of the benefit associated with the utilization of the net operating loss carryforwards was allocated to additional paid-in capital. The shift in taxable income to the U.S. resulted in no tax liability, but reduced the Company's net operating loss carryforwards to approximately $8.7 million as of March 31, 2002, of which the entire benefit, when utilized, would be allocated to additional paid-in-capital.

Adjusted EBITDA

         Earnings before interest and other income (expense), income taxes, amortization, depreciation and non-cash compensation expense, or Adjusted EBITDA, as a percentage of revenues were 14% and 11% for 2002 and 2001, respectively. Adjusted EBITDA increased $1.7 million, or 94%, from $1.8 million in 2001 to $3.6 million in 2002.

14

LIQUIDITY AND CAPITAL RESOURCES

         In February 2000 and March 2002, we closed the initial public offering and secondary offering of our common stock, issuing 4.1 million and 1.6 million shares of common stock, respectively, realizing net proceeds of $59.0 million and $29.2 million, respectively.

         Our highly liquid assets consist of cash and cash equivalents plus our investments in marketable securities. For the three months ended March 31, 2002, our highly liquid assets increased by $2.6 million, or 6%, from $42.0 million at December 31, 2001 to $44.6 million at March 31, 2002.

         Cash and cash equivalents as of March 31, 2002 were $29.8 million, a decrease of $5.6 million from December 31, 2001.

         Net cash used in operating activities for the three months ended March 31, 2002 was $10.5 million. Net cash used in operating activities primarily resulted from our payment of accrued annual employee incentive bonuses and commissions for 2001, and the reduction of deferred revenue, partially offset by depreciation and amortization.

         Net cash used in investing activities during the three months ended March 31, 2002 was $10.1 million and resulted from the net purchase of $8.2 million in marketable securities, $0.9 million of capital expenditures for computer and communications equipment, purchased software, office equipment, furniture, fixtures and leasehold improvements, and contingent acquisition consideration resulting from an acquisition by Altra prior to Caminus’ acquisition of Altra.

         Net cash provided by financing activities during the three months ended March 31, 2002 was $15.3 million. During the three months ended March 31, 2002 we completed our secondary offering of 1.6 million shares raising $29.2 million of which $15.0 million was used to repay our borrowings under a credit facility. In addition financing activities provided cash of $0.5 million from the sale of common stock in connection with our employee stock purchase plan and $0.6 million from the exercise of stock options.

         We expect that our working capital needs will continue to grow as we execute our growth strategy. We believe the cash and investment balances at March 31, 2002 and cash to be generated from operations will be sufficient to meet our expenditure requirements for the foreseeable future.

Certain Factors That May Affect Our Business

Our quarterly operating results may fluctuate substantially, which may adversely affect our business and the market price of our common stock, particularly if our quarterly results are lower than the expectations of securities analysts.

         Our revenues and results of operations have fluctuated in the past and may vary from quarter to quarter in the future. These fluctuations may adversely affect our business, financial condition, and the market price of our common stock particularly if our quarterly results fall below the expectations of securities analysts. A number of factors, many of which are outside our control, may cause variations in our quarterly revenues and operating results, including:

• changes in demand for our software solutions and strategic consulting services;

• the length of our sales cycle, and the timing and recognition of sales of our products and services, including the timing and recognition of significant product orders;

• unexpected delays in the development and introduction of new products and services;

• increased expenses, whether related to sales and marketing, software development or other corporate activities;

• changes in the rapidly evolving market for products and services in the energy industry;

• the mix of our revenue during any period, particularly with respect to the breakdown between software license and services revenues;

• the hiring, retention and utilization of personnel;

• costs related to the integration of people, operations and products from previously acquired businesses and technologies and from future acquisitions, if any; and

15

• general economic conditions.

         Accordingly, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily meaningful. You should not rely on our historical quarterly results as an indication of our future performance.

Our sales cycle may be subject to seasonality, which could result in fluctuations in the market price of our common stock.

         We may experience seasonality in the sales of our software. For instance, many of our current and potential customers in the energy industry face budgetary pressures to invest in energy software before the end of each fiscal year. As a result, we may tend to report higher revenues during the fourth quarter of our fiscal year and lower revenues during the first quarter of our fiscal year. These seasonal variations in our sales may lead to fluctuations in our quarterly operating results, which in turn may lead to volatility in the market price of our common stock.

Substantial competition could reduce our market share and materially adversely affect our financial performance.

         The market for products and services in the energy industry is very competitive, and we expect competition to intensify in the future. We currently face competition from a variety of sources, including energy software providers, in-house development, large consultancies, enterprise software companies and providers of strategic consulting services.

         Some of our current and potential competitors have longer operating histories, greater name recognition, greater resources, and a higher number of established customer relationships than we have. Many of these competitors also have extensive knowledge of our industry. As a result of these factors, some of our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the marketing and sale of their products. If we are not able to compete effectively, our business, results of operations, and financial condition could be materially adversely affected.

We may not be able to successfully manage the expansion of our operations.

         We have experienced, and are currently experiencing, a period of significant growth. We cannot assure you that we will not experience difficulties managing our growth in the future. Future growth may place increased demands on our management, financial and operational resources. In addition, as part of our growth, we will need to expand, train and manage our employee base and maintain close coordination within our organization. If we are unable to manage our growth effectively, our business, results of operations, and financial condition could be materially adversely affected.

Our future results may be harmed by economic, political, regulatory and other risks associated with international sales and operations.

         Because we sell and market our products worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenues from international operations will represent an increasing portion of our total revenues going forward. Accordingly, our future results could be harmed by a variety of factors, including:

• the need to comply with the laws and regulations of different countries;

• difficulties in enforcing contractual obligations and intellectual property rights in some countries;

• difficulties and costs of staffing and managing foreign operations;

• fluctuations in currency exchange rates and the imposition of exchange or price controls or other restrictions on the conversion of foreign currencies;

• difficulties in collecting international accounts receivable and the existence of potentially longer payment cycles;

• the impact of possible recessions in economies outside the United States; and

• political and economic instability, including instability related to terrorist attacks in the United States and abroad.

         If we are unable to minimize the risks associated with international sales and operations, our business, results of operations, and financial condition could be materially adversely affected, which could cause our stock price to decline.

We may pursue strategic acquisitions, which could have an adverse impact on our business if unsuccessful.

16

         We may from time to time acquire or invest in complementary companies, products or technologies. For instance, in November 2001, we acquired Altra Software Services, Inc. From time to time, we may evaluate other acquisition opportunities that could provide us with additional product or services offerings or additional industry expertise. These acquisitions, if any, may result in difficulties for us in assimilating acquired operations and products, and could result in the diversion of our capital and our management’s attention from other business issues and opportunities. For instance, the integration of acquired companies may result in problems related to the integration of technology and management teams. We may not be able to successfully integrate operations, personnel or products that we have acquired or may acquire in the future. If we fail to successfully integrate our recent acquisitions and any future acquisitions, our business, results of operations, and financial condition could be materially adversely affected. In addition, our acquisitions may not be successful in achieving our desired strategic objectives, which would also cause our business to suffer. Acquisitions also may present other risks, such as exposing our company to potential unknown liabilities associated with acquired businesses.

If we fail to adapt to rapid changes in the energy market, our existing products could become obsolete.

         The market for our products is marked by rapid technological changes, frequent new product introductions, uncertain product life cycles, changes in customer demands, and evolving industry standards and regulations. We may not be able to successfully develop and market new products or product enhancements that comply with present or emerging technology standards. Also, any new regulations or technology standards could increase our cost of doing business.

         New products based on new technologies or new industry standards could render our existing products obsolete and unmarketable. To succeed, we will need to enhance our current products and develop new products on a timely basis to keep pace with developments related to the energy market and to satisfy the increasingly sophisticated requirements of our customers. Software addressing the trading, transaction processing, and risk management of energy assets is complex and can be expensive to develop, and new products and product enhancements can require long development and testing periods. Any delays in developing and releasing new or enhanced products could cause us to lose revenue opportunities and customers.

Our software products may contain errors, which could damage our reputation, decrease market acceptance of our products, cause us to lose customers and revenue, and result in liability to us.

         Despite internal testing and testing by third parties, complex software products such as ours often contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Serious defects or errors could result in lost revenues or a delay in market acceptance.

         Because our customers use our products for critical business applications, errors, defects or other performance problems could result in damage to our customers. Although our license agreements typically contain provisions designed to limit our exposure to potential liability claims, these provisions could be invalidated by unfavorable judicial decisions or by federal, state, local or foreign laws or regulations. If a claim against us was successful, we might be required to incur significant expense and to pay substantial damages. Even if we were to prevail, the accompanying publicity could adversely affect the demand for our products.

We may be unable to adequately protect our intellectual property rights, which could result in the use of our technology by competitors or other third parties.

         Our success depends in large part upon our proprietary technologies. We rely upon a combination of copyright and trade secret protection, confidentiality and nondisclosure agreements, and licensing arrangements to establish and protect our intellectual property rights. We seek to prevent disclosure of our trade secrets through a number of means, including requiring those individuals with access to our proprietary information to enter into nondisclosure agreements with us and restricting access to our source code. Trade secret and copyright laws, under which we seek to protect our software, documentation, and other proprietary materials, provide only limited protection. Despite these efforts to protect our proprietary rights, unauthorized parties may be successful in copying or otherwise obtaining and using our software. In addition, other parties may breach confidentiality agreements or other protective contracts that we have entered into with them, and we may not be able to enforce our rights in these circumstances. Any actions taken by us to enforce our intellectual property rights could result in significant expense to us as well as the diversion of management time and other resources.

         In addition, detecting infringement and misappropriation of intellectual property can be difficult, and there can be no assurance that we would detect any infringement or misappropriation of our proprietary rights. Even if we are able to detect infringement or misappropriation of our proprietary rights, litigation to enforce our rights could cause us to divert significant financial and other resources from our business operations, and may not ultimately be successful. Moreover, we license our software internationally, and the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States.

17

If we are unable to rely on licenses of intellectual property from third parties, our ability to conduct our business could be harmed.

         We rely on third-party licensors for technology that is incorporated into, and is necessary for the operation of, some elements of our software. Our success will depend in part on our continued ability to have access to such technologies that are or may become important to the functionality of our products. We cannot assure you, however, that such licenses will be available in the future on favorable terms or at all.

We could become subject to claims of infringement of third-party intellectual property rights, which could limit our ability to conduct our business.

         There has been a substantial amount of litigation in the software industry regarding intellectual property rights. It is possible that, in the future, third parties may claim that our products infringe upon their intellectual property. Energy software product developers may increasingly become subject to infringement claims as the number of products and competitors in the energy software industry grows and the functionality of products from different software developers overlaps. Parties making infringement claims may be able to obtain an injunction against us, which could prevent us from selling our products in the United States or in foreign countries. Any such injunction could significantly harm our business. Moreover, any infringement claims, with or without merit, could be time consuming, result in costly litigation, divert management’s attention, cause product shipment delays, force us to redesign or cease selling products or services that incorporate the challenged intellectual property, or require us to enter into royalty or licensing agreements, which may not be available on reasonable terms or at all. Such royalty or license agreements, if required, may not be available on terms acceptable to us or at all, which could materially adversely affect our business. Even if we ultimately are able to enter into royalty or license agreements, these agreements may require us to make payments that may adversely affect our results of operations. In addition, we may be obligated to indemnify customers against claims that we infringe upon intellectual property rights of third parties.

We will need to recruit, train and retain sufficient qualified personnel in order to successfully expand our business.

         Our future success will depend to a significant extent on our ability to recruit and retain highly qualified technical, sales and marketing, and other personnel. If we do not attract and retain such personnel, we may not be able to expand our business. Competition for qualified personnel is intense in the energy industry. There are a limited number of people with the appropriate combination of skills needed to provide the services that our customers demand. We expect competition for qualified personnel to remain intense, and we may not succeed in attracting or retaining sufficient personnel. In addition, newly hired employees generally require substantial training, which requires significant resources and management attention. Even if we invest significant resources to recruit, train and retain qualified personnel, we may not be successful in our efforts.

We may seek additional financing in the future, which could be difficult to obtain and which could dilute your ownership interest or the value of your shares.

         We intend to continue to invest in the development of new products and enhancements to our existing products. We believe that our current cash and investment balances, together with cash generated from our operations, will be sufficient to meet our operating and capital requirements for the foreseeable future. However, from time to time, we may seek to raise additional funds through public or private financing, or other arrangements. Obtaining additional financing will be subject to a number of factors, including market conditions, our operating performance, and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unattractive for us. If we are unable to raise capital to fund our operations, we may not be able to successfully grow our business.

         If we raise additional funds through the sale of equity or convertible debt securities, your percentage ownership will be reduced. In addition, these transactions may dilute the value of our outstanding stock. We also may issue securities that have rights, preferences and privileges senior to our common stock.

Terrorist attacks or acts of war may seriously harm our business.

         Terrorist attacks or acts of war may cause damage or disruption to our company, our employees, our facilities and our customers, which could significantly impact our revenues, costs and expenses, and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially adversely affect our business, results of operations, and financial condition. The long-term effects on our company of the September 11, 2001 attacks are unknown. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that we currently cannot predict.

18

Our performance will depend on the continued growth in demand for wholesale energy trading, transaction processing, and risk management products and services.

         Our future success will depend on the continued growth in demand for wholesale energy trading, transaction processing, and risk management products and services, which is difficult to predict. If demand for these products and services does not continue to grow or grows more slowly than expected, demand for our software and services will be reduced. Utilities, energy service providers and other businesses, such as commercial or industrial customers, may be slow to adapt to changes in the energy marketplace or may be satisfied with existing services and solutions. This could result in less demand for our software and services than we currently expect. Because a substantial portion of our operating expenses is fixed in the short term, any unanticipated reduction in demand for our software and services would negatively impact our operating results. Even if there is significant market acceptance of wholesale energy trading, transaction processing, and risk management products and services, we may incur substantial expenses adapting our software and services to changing needs.

The global energy industry is subject to extensive and varied governmental regulations, and, as a result, our business may be adversely affected if we are unable to successfully develop software and services that address numerous and changing regulatory regimes.

         Although the global energy industry is becoming increasingly deregulated, it is still subject to extensive and varied local, regional and national regulation. These regulations affect all energy industry participants, including utilities, producers, energy marketers, processors, storage operators, distributors, marketers and pipelines. If we are unable to design and develop software solutions and strategic consulting services that address the numerous and changing regulatory requirements or we fail to alter our software and services rapidly enough, our customers or potential customers may not purchase our software and services.

         In addition, it is difficult to predict the extent to which the global energy industry will continue to become deregulated. The recent bankruptcy filing of Enron Corporation, formerly one of the energy industry’s largest traders and market makers, has resulted in numerous government and private inquiries and investigations into Enron’s business and the energy industry in general. The impact of such inquiries and investigations cannot be determined at this time. Any changes to the laws and regulations to which companies in the energy industry are subject may materially adversely affect our business, results of operations, and financial condition.

Our financial success is closely linked to the health of the energy industry.

         We currently derive substantially all of our revenues from licensing our software and providing strategic consulting services to participants in the energy industry. Our customers include a number of organizations in the energy industry, and the success of these customers is linked to the health of the energy industry. Accordingly, the success of our business, in turn, depends on the continued health of the energy industry. Moreover, because of the capital expenditures required in connection with investing in our software and services, we believe that demand for our software and services could be affected by fluctuations, disruptions, instability or downturns in the energy market, which may cause current and potential customers to leave the energy industry or delay, cancel or reduce any planned expenditures for our software solutions and strategic consulting services.

Enron Corporation’s recent bankruptcy filing could adversely affect the health of the energy industry.

         We currently cannot determine the full impact on the energy industry of Enron Corporation’s recent bankruptcy filing. Prior to its bankruptcy, Enron was a dominant participant in the energy industry, and therefore its financial difficulties may have a significant impact on the energy industry, including:

• serving as a possible catalyst for changes to the regulatory regimes governing the energy industry; and

• resulting in losses to companies in the energy industry due to their credit exposure to Enron.

         We cannot assure you that any such effects will not harm our business. For instance, some of our current and potential customers may have credit exposure to Enron through various contractual arrangements, such as energy commodity and derivative trading contracts. To the extent that any of our current or potential customers are adversely affected as a result of their credit exposure to Enron, they may reduce their current and future capital expenditures, which could reduce our revenues.

19

Our stock price has been and may remain volatile.

         The market price of our common stock has been in the past, and may in the future be, subject to wide fluctuations in response to factors such as:

• variations in quarterly operating results;

• announcements, by us or our competitors, of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

• changes in recommendations or financial estimates by securities analysts;

• loss or addition of major customers;

• conditions and trends in the energy industry; and

• general conditions in the economy or the financial markets.

         In addition, in recent years, the stock market has experienced significant price and volume fluctuations, which are often unrelated to the performance or condition of particular companies. Such broad market fluctuations could adversely affect the market price of our common stock. Following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against a company. If we become subject to this kind of litigation in the future, it could result in substantial litigation costs, damages awards against us, and the diversion of our management’s attention and resources.

Provisions in our charter documents and Delaware law may prevent or delay acquisition of us.

         Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions include those that:

• provide for a classified board of directors with staggered, three-year terms;

• limit the persons who may call special meetings of stockholders;

• prohibit stockholder action by written consent; and

• establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be presented at stockholder meetings.

         Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. These provisions apply even if the offer may be considered beneficial by some stockholders.

Because a small number of stockholders own a significant percentage of our common stock, they significantly influence major corporate decisions and our other stockholders may not be able to influence these corporate decisions.

         Our executive officers and directors and their affiliates beneficially own approximately 26.2% of our outstanding common stock. If these parties act together, they can significantly influence the election of all directors and the approval of actions requiring the approval of a majority of our stockholders. The interests of our executive officers and directors and their affiliates could conflict with the interests of our other stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We have no derivative financial instruments. We invest our cash and cash equivalents in investment-grade, debt instruments of state and municipal governments and their agencies and high quality corporate issuers, money market instruments and bank certificates of deposit. As of March 31, 2002, we invested the remaining net proceeds from our initial public offering and secondary offering in similar investment-grade and highly liquid investments.

         Our earnings are affected by fluctuations in the value of our subsidiaries’ functional currency as compared to the currencies of our foreign denominated sales and purchases. The results of operations of our subsidiaries, as reported are dependent upon the various

20

foreign exchange rates and the magnitude of the foreign subsidiaries’ financial statements. At March 31, 2002, our foreign currency translation adjustment was not material and, for the three months ended March 31, 2002, net foreign currency transaction losses were insignificant. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales and related expenses, changes in exchange rates affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive.

         For the three months ended March 31, 2002, approximately 18% of our revenues and 14% of our operating expenses were denominated in British pounds. Historically, the effect of fluctuations in currency exchange rates has not had a material impact on our operations. Our exposure to fluctuations in currency exchange rates will increase as we expand our international operations. We conduct our European operations in the United Kingdom and the countries of the European Union, which are part of the European Monetary Union. We have also reviewed the impact the Euro has on our business and whether this will give rise to a need for significant changes in our commercial operations or treasury management functions. Because our European transactions are primarily denominated in British pounds and as yet we have not experienced any significant impact on our European operations from the fluctuations in the exchange rate between Euro and British pounds, we do not believe that fluctuations in the value of the Euro will have any material effect on our business, financial condition or results of operations.

PART II

OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

         The following information relates to the use of proceeds from our initial public offering of common stock. The effective date of our Registration Statement on Form S-1, commission file number 333-88437, relating to our initial public offering, was January 27, 2000.

         Our net offering proceeds, after deducting the total expenses of $6,382 (in thousands), were $59,028 (in thousands).

         From the effective date of the Registration Statement through March 31, 2002, we used the net proceeds from the offering as follows (in thousands):

Repayment of Indebtedness	$	4,309
Capital Expenditures		8,096
Termination Fee for Consulting Services		1,300
Bonus payments		522
Lease Termination Fee		186
Earn-out Payment to Zak Associates, Inc.		355
Security Deposit on New York lease		1,739
Acquisition of DC Systems		184
Acquisition of Nucleus		13,676
Acquisition of Altra		11,803
Investments in Marketable Securities		2,151
Cash Used in Operations		14,707
	$	59,028

21

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

                  None.

         (b)  Reports on Form 8-K

         On February 4, 2002, we filed a Current Report on Form 8-K/A. The Form 8-K/A amended the Current Report on Form 8-K, dated November 20, 2001, which we filed to furnish information regarding our acquisition of Altra Software Services, Inc. pursuant to Item 2 of Form 8-K. The Form 8-K/A includes, pursuant to Item 7 of Form 8-K, unaudited financial statements of Altra Software Services, Inc. and unaudited pro forma financial statements of the Company that give effect to the acquisition. The acquisition was accomplished by purchasing from Altra Energy Technologies, Inc. all of the capital stock of Altra Software Services, Inc. pursuant to a Stock Purchase Agreement, dated as of October 12, 2001, by and between the Company and Altra Energy Technologies, Inc. No other reports on Form 8-K were filed by us during the quarter ended March 31, 2002.

22

SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 13, 2002

CAMINUS CORPORATION
Registrant
/s/     Joseph P. Dwyer
Chief Financial Officer
and
Registrant’s Authorized Officer

23